Battered Energy Is Due for a Snap-Back

We've talked about the energy sector a couple times in the past month, with the group having reached deep oversold levels as it's led the markets lower. The sector has fallen apart since February amid disintegration in natural gas prices, which have been due to oversupply issues created by new technologies -- horizontal drilling and hydraulic fracturing. All of this has created confusion in the space. Energy has seen a complete collapse of bullish traction, even despite the fact that crude oil prices have managed to hold above key support at the $100-per-barrel level. Internally, the weakness in this sector has reached an extreme level, and we see a technical setup in place for a reversion to the mean and a bullish bounce in the group. This is a contrarian call, but we do believe the energy space has some bullish potential.

The first technical point we want traders to look at is the oversold condition created in the 40-day SARSI indicator, a measure of intermediate-term trend strength. The indicator reached deep oversold levels in mid-April, and it really has nowhere to go but up. It has already turned higher, in fact, and it's showing intermediate-term trends regaining some bullish traction. Further, the large-cap energy index has formed a bullish reversal bar in the weekly price chart -- seen below through the Energy Select Sector SPDR (XLE) -- which coincides with the oversold reading. The combination of a bullish reversal bar at oversold levels creates a bullish inflection point that we expect to resolve to the upside....493 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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